BWTP Vietnam Industry Assessment August 2008

8/7/2019 BWTP Vietnam Industry Assessment August 2008

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Vietnam Industry Assessment

A Report on the Vietnamese Microfinance Sector

August 2008

Produced by The Banking with the Poor Network incollaboration with the SEEP Network

Funded by the Citi Foundation as an activity of the CitiNetwork Strengthening Program


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Foreword

This assessment was completed as a Banking with the Poor Network (BWTP Network)activity within the Citi Network Strengthening Program, in collaboration with the SEEPNetwork and funded by the Citi Foundation.

The Citi Network Strengthening Program supports the development of IndustryAssessments for national and regional level networks. The purpose of the BWTP NetworkIndustry Assessments is to provide an overview of the microfinance sectors in which theBWTP Network operates. These assessments aim to extend beyond the performance ofindividual institutions, and focus on the development of the microfinance market as a wholeby being both descriptive and analytical in nature. The aim of these assessments is toprovide an outlook on each industry that is a valuable resource to the BWTP Network, itsmembers and the wider microfinance community.

The Vietnam Industry Assessment is a review of the microfinance sector in Vietnam, andconstitutes a new contribution to the BWTP Networks Asia Resource Center for

Microfinance. This assessment builds on a country profile completed by the BWTP Networkin 2006. The Vietnam Industry Assessment is are based on research conducted from a deskstudy, as well as contributions resulting from meetings with key stakeholders andpractitioners in Vietnam in June and July 2008 in Vietnam.

The ARCM is based on dialogue and information exchange at national and regional levels inSouth and Southeast Asia, and aims to constitute a one-stop learning and information hubfor BWTP members and other microfinance actors in Asia.The ARCM promotes increased outreach and efficiency of financial services for the poor inSouth and Southeast Asia, services that are essential in the fight against poverty in theregion, improving the lives of millions through asset building and increased income.The ARCM has two main objectives:

First, the ARCM aims to encourage partnerships and cooperation in Asia, amongmicrofinance providers and supporters, and between providers and financiers, inorder to increase financial support for microfinance schemes and to increase peerlearning.

Second, the ARCM aims to build a knowledge management platform accessible toall microfinance actors in the Asia region, in order to increase institutional capacity,to increase the dissemination of innovations, and to develop regional and sub-regional standards in microfinance.

Acknowledgements

This Vietnam Industry Assessment was produced by Ms Lene Hansen and Ms Lilly Diazunderthe direction of Jamie Bedson, BWTP Network Lead Coordinator and Asia RegionalRepresentative at The Foundation for Development Cooperation (FDC).

The Vietnam Industry Assessment is also the result of a close and productive collaborationbetween Ms Hansen and Ms Diaz, the BWTP Network, the Foundation for DevelopmentCooperation, in-country partners and Vietnam microfinance industry stakeholders includingthe Vietnam Microfinance Working Group, the State Bank of Vietnam, the Vietnam Bank forSocial Policies and M7. The BWTP Secretariat would like to thank all those who participatedin its production.


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Table of Contents

ACRONYMS AND ABBREVIATIONS..................................................................................... ........................ 4

1. COUNTRY OVERVIEW........................................................... ......................................................... ....... 5

1.1 GEOGRAPHY................................................... ........................................................... ........................... 51.2 POPULATION AND DEMOGRAPHICS ........................................................ .............................................. 5

1.2.1 Poverty............................................................. .............................................................. ................. 61.2.2 Labor and Employment......................................... ........................................................... ............... 7

1.3 MACROECONOMIC CONDITIONS AND ECONOMIC PERFORMANCE........................................................ 7

2. FINANCIAL SECTOR OVERVIEW ........................................................ ............................................... 8

2.1 THE MAIN PLAYERS ........................................................... ........................................................... ....... 82.2 CREDIT SERVICES..................................................... ........................................................... ............... 102.3 SAVINGS SERVICES .................................................. ........................................................... ............... 112.4 OTHER FINANCIAL SERVICES ....................................................... ...................................................... 112.5 ACCESS TO FINANCE BY THE BOTTOM OF THE PYRAMID (BOP)........................................ ................. 13

3. REGULATIONS AND GOVERNMENT INITIATIVES........................................................... .......... 16

3.1 FINANCIAL SECTOR REFORMS...................................................... ...................................................... 163.1.1 Price Setting........................................................... ................................................................. ...... 16

3.2 POLICY,LEGAL AND REGULATORY FRAMEWORK FOR MICROFINANCE ............................................. 173.2.1 Microfinance Policy Framework .............................................................. ................................... 173.2.2 Legal and Regulatory Framework for Microfinance.......................................................... .......... 173.2.3 Licensing Requirements: Operational Issues for MFIs ................................................................ 19

4. MICROFINANCE SECTOR DEVELOPMENT........................... ........................................................ 20

4.1 HISTORY......................................................... ........................................................... ......................... 204.2. THE RETAIL SECTOR: FINANCIAL SERVICE PROVIDERS...................................................... ............... 21

4.2.1 Products and Services........................... ................................................................ ........................ 254.2.2 Market Gaps ....................................................... ............................................................ ............. 294.2.3 Trends and Innovations ........................................................ ....................................................... 30

4.3 MICROFINANCE MESO-LEVELORGANIZATIONS .................................................. ......................... 324.3.1 National Associations and Networks ............................................................ ................................ 324.3.2 Training and Consultancy ................................................................ ............................................ 334.3.3 Other Industry Support Services............................................................ ....................................... 34

5. FUNDING SOURCES ................................................... ........................................................... ................ 35

6. IMPACT ASSESSMENT AND POVERTY MEASUREMENT .......................................................... 36

7. CHALLENGES AND OPPORTUNITIES ................................................................ ............................. 37

8.

FURTHER INFORMATION .......................................................... ........................................................ 40


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Acronyms and Abbreviations

ADB Asian Development BankAFD Agence Franais de DeveloppementBOP Bottom of the PyramidCCF Central Credit FundCEP Capital Fund for Employment of the PoorCFRC Community Finance Resource CenterCIC Credit Information CenterCPRGS Country Poverty Reduction and Growth StrategyDFID Department for International Development (UK)DIV Deposit Insurance of Viet NamIFC International Finance Corporation

GoVN Government of Viet NamHEPR Hunger Eradication and Poverty Reduction ProgramINGO International Non-Governmental OrganizationJSCB Joint Stock Commercial BankLIH Low Income HouseholdLSS Living Standards SurveyLPC Local Peoples CommitteeLUC Land Use CertificateMO Mass OrganizationMFI Microfinance Institution used for licensed, semi-formal providersMFO Microfinance Organization used in Viet Nam for unregulated providersMFWG Microfinance Working Group

MSE Micro, small enterprisesOSS Operational Self-Sufficiency ratio (% of direct costs covered by revenue)PaR Portfolio at Risk (% of portfolio contaminated by arrears)PCF Peoples Credit FundRoA Return on AssetsRoE Return on EquitySBV State Bank of Viet NamSCIC State Capital Investment CorporationSME Small and Medium EnterprisesSOCB State-owned Commercial BankTYM Tau Yeu May FundVAPCF The Viet Nam Association of Peoples Credit Funds

VBARD Viet Nam Bank for Agricultural and Rural DevelopmentVBSP Viet Nam Bank of Social PolicyVDB Viet Nam Development BankVPSC Viet Nam Postal Savings CompanyVND Vietnamese DongVWU Viet Nam Womens UnionWB World Bank


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1. Country Overview

1.1 Geography

Viet Nam is located on the eastern margin of theIndochinese Peninsula and occupies some 331,688 km2.The country is divided into the Highlands and the RedRiver Delta in the north, the Giai Truong Son (CentralHighlands), the coastal lowlands, and the Mekong RiverDelta in the South. It is prone to natural disasters includingdrought and cold in the North, floods in the deltas, andtyphoons along the coast.The two largest cities are Ho ChiMinh City (3.14 million), and Hanoi (1.34 million). There are59 provinces and five municipalities with a total of 671districts subdivided into 10,876 communes1.

1.2 Population and Demographics

In 2008, Viet Nams population will surpass 86 million. According to the latest LivingStandard Survey (2004), about 26% of the population is younger than 14 years and 6% areolder than 65 years, hence the economically active population (15-64 year-olds) makes up68.6% of the population, or 59 million people, of whom 50.8% are women2.

Table 1. Population and Demographic Data, Viet Nam, 2000-08

The population density varies considerably in Viet Nam. It is lowest in the northernhighlands, at around 68 persons per km2, while the two river deltas are the highest. The RedRiver Delta has over 1,225 people per km2. Most Vietnamese live in rural areas, but therapid economic growth over the past 10 years has resulted in significant rural-to-urbanmigration. Around 72.5% of the population lives in rural areas today3.

1 General Statistical Office of Viet Nam: Statistical Year Book of Viet Nam, 2007.2 CIA World Fact 2008, 2008 estimates and GSO: Statistical Year Book of Viet Nam, 2007.3

GSO: Statistical Year Book of Viet Nam, 2007.

2000 2005 2006 2007 2008

Total Population (WDI/CIA 2008) 77.64m 83.10m 84.11m 85.2m 86.1m

Population growth (WDI/CIA 2008) 0.2 1.3 1.2 1.2 0.99%Economically Active Population 69% 68.6% 68.6%Adult literacy rates (HDR 2007)(1995-2005)

90.3% 90.3%.. .. ..

Life expectancy (WDI, 2008) 69 71 71 .. ..% of population below the nationalpoverty line

19.5%..

16% 14.2%..

Population density (ADB 2007) 236 252 254 257 ..% of population in rural areas (ADB2007/GSO)

75.8 73.1 72.88 70%..

Human Development Index .. .. .. 0.733 ..Human Development Ranking (outof 177) .. .. ..

105..

Sources: World Development Indicators (2008), Asian Development Bank (2007), HumanDevelopment Report (2007); GSO: Statistical Year Book of Viet Nam, 2007.


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The majority ethnic groups of Kinh (Viet) make up 86% of the total population while 14% arefrom the 53 small, heterogeneous ethnic groups, of whom the largest are the Tay andMuong4. These ethnic minorities, however, remain vastly over-represented on the povertymap of the country.

1.2.1 Poverty

Viet Nam is a success story for drastically reducing poverty rates. From 1993 to 2006, 42%of the population, or 35 million people, were lifted out of poverty, reducing the percentage ofpeople living under the national poverty line from 58% to 16%.5 By the end of 2007, thepoverty rate was reduced even further to 14.2%, and while this is impressive, it still leaves12.3 million Vietnamese living in poverty.6

Most low-income households are in rural areas7 and are predominantly engaged inagricultural crop production and raising of small livestock, selling any surplus produce at thelocal markets. Most of these households8 (86%) have access to land. In addition to farming,at least 35% operate non-farm household businesses9. The improvement of physical

infrastructure has contributed to the reduction of poverty. Similarly, access to irrigation, high-value crops (such as coffee, spices, shellfish or fish in addition to rice) and to a local marketpositively impacts income generation from both farm and non-farm activities.

The GDP per capita income has risen over the past few years, from $410 in 2004 to $835 in2007. However, there is a large difference between the average per capita incomes of$793/year for urban residents and the rural average per capita income of $374/year (2006).

Poverty is more strongly related to ethnicity than to geography and remoteness. In 2006,only 10% of Kinh and Chinese were poor, while 52% of ethnic minorities lived below thepoverty line. Poverty is vastly more persistent in the northern mountains, Central Highlands,and along the flood-prone delta coastlines where ethnic minority residents live.

For the first time in 13 years, urban poverty is not declining. Currently, migrant workersreceive lower wages, lack access to social protections such as health care, and theirchildren cannot access education without resident certificates. The recent price hikes of foodand oil, and the boom in real estate prices, do not bode well for the poverty situation inurban areas over the next few years, when rural-urban migration is expected to reach 1million people annually10.

The main reasons for Viet Nams huge success in poverty reduction are government policiesto distribute agricultural land to rural households and support for the integration ofagriculture into the market economy, while job creation in the private sector has been

promoted as part of the overall economic reforms since 1986.

1

The goal set by the Ministryof Labor, Invalids, and Social Affairs (MOLISA) for 2008 is to focus on the 58 districts wherepoverty rates exceed 50% of the population, and to reduce the overall household povertyrate to 12%11.

4 Asian Development Bank: Ethnic Minorities and Poverty Reduction, June 2002.5

World Bank. Viet Nam Development Report 2008.6

In 2006, the national poverty line was set at VND 260,000 (US $16) per month per person in urban areas and VND 200,000(USD$12) per person per month in rural areas.7

IMF: Country Report 07/386 Viet Nam, Statistical Appendix, December 2007.8As microfinance is normally serving only one member of the household, but benefiting the entire family, the market size is

often given in number of households.9 World Bank: Viet Nam Development Report, 2004: Poverty.10 World Bank: Viet Nam Development Report 2008: Social Protection.11

Viet Nam development Focus: Poverty Alleviation. http://www.Viet Namgateway.org/focus


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1.2.2 Labor and Employment

The labor force of Viet Nam is estimated at 51.87 million people 12 and the agriculture sectorcontinues to employ the highest percentage of workers. (The rate has slowly declined from64% of the labor force in 2000 to 54% in 2007.) As the engine of economic growth, the

private sector is generating increasing employment in the growing manufacturing andservice sectors, including trade, finance and a booming tourist sector. With decreasingrates of infant mortality and increasing life spans, key demographic challenges for thecountry will be the continuing creation of jobs for the 1.6 million young people entering thework force every year, increasing the supply of skilled labor, and the generation of resourcesto care for an aging population.

With massive economic growth in recent years, Viet Nam has an overall low unemploymentrate. From 2000 to 2005, unemployment steadily declined to the current 2.1% of theeconomically active population, highest in the urban areas of the Red River Delta at 5.74%.In real numbers, 1.24 million Vietnamese were unemployed in 200713.

Table 2. Labor Market Data, Viet Nam, 2000-2007

1.3 Macroeconomic Conditions and Economic Performance

Viet Nam is in its third consecutive year of 8%-plus growth. The economic performance hasrelied on strong performance from industry, construction, services and trade, where growthrates have been between 8.3% and 10.4%. Integration with the world economy hasstrengthened significantly with exports accounting for 71% of GDP in 2005, up from 56% in2001, and private sector employment grew five-fold over the same period. Agricultural sectorgrowth slowed due to a number of natural catastrophes - including drought in the North,floods in the north-central region and Mekong River Delta, and pests in the South - but stillmaintained an annual growth rate of 3.5%. The transition to a market-led economy isevidenced by an increase in the share of domestic private investment in total investmentrising from 23% in 2001 to over 32% in 200514.

The business climate continued to improve after accession to the World Trade Organization(WTO) in January 2007, with total investments increasing to 40.4% of GDP. Foreign directinvestment almost doubled to $20.3 billion, and the domestic private sector increased by59,000 new enterprises registered, 26% more than in 2006.

12 GSO: Statistical Year Book of Viet Nam, 2007.13 GSO: Statistical Year Book of Viet Nam, 2007.14

World Bank: Country Assistance Strategy, 2007-2011.

2000 2004 2005 2006 2007

Labor force (GSO 2007)By occupation in: Agriculture

IndustryServices

37.6m 41.6m

42.5m55.6%18.9%25.4%

43.3m 44.2m54.2%19.5%25.5%

Labor force by sector:StatePrivateForeign companies

100%9.3%

90.1%0.6%

100%9.9%

88.6%1.5%

100%9.5%

88.9%1.6%

100%9.2%

89.2%1.6%

100%9%

89.4%1.6%

Unemployed 0.9 m 0.9 m 1.1 m .. 1.2 m

Unemployment Rate 2.3 2.1/5.6 2.1/5.3 .. ..

Data Sources: Key Indicators of Developing Asian and Pacific Countries, ADB, 2007; ADB Developmentoutlook; GSO: Statistical Year Book of Viet Nam, 2007.


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Table 3. Macro-economic Developments

This consistent high growth led to large increases in credit, stock market activity, andconsumption, especially of imported goods, and in 2007 Viet Nams economy began to

show signs of overheating. The stock market boom in the first half of 2007 was curbed byState Bank intervention to cap lending for purchase of securities, but the investment surgemoved to the real estate market, causing an unprecedented price hike. As Viet Nam is amajor food exporter (rice) and exports as much crude oil as it imports gasoline, the countryas a whole benefits from the increasing world market prices. Along with the global priceincreases in food and oil, however, the currency (Dong) was appreciating and inflationaccelerated from 6.6% in December 2006 to 18.3% by March 2008.

With rapid growth remaining a priority, it took time for the Government to react to theoverheating economy. But by February 2008, a shift in priorities toward macro-economicstability seemed to have taken hold with a policy mix of fiscal, monetary, and exchange ratemeasures being enforced to try to stem the credit-led investment frenzy, control inflation,and ensure financial market stability. In other words, to cool the economy 16. Viet Namseconomy is resilient and GDP growth rates of 7.4% in March 2008 against the announcedannual target of 7% would suggest that stabilization measures can continue to be givenpriority17.

2. Financial Sector Overview

The formal financial sector in the country is supervised by the State Bank of Viet Nam(SBV), which has branches in all 59 provinces and five municipalities and regulates andsupervises banks, non-bank financial institutions, and the regulated financial cooperatives,Peoples Credit Funds (PCFs). SBV operates the Credit Information Center (CIC),

functioning similarly to publicly-owned credit reference bureaux elsewhere. Supporting theregulator is the Deposit Insurance of Viet Nam (DIV), which issues deposit certificates tofinancial institutions and manages liquidation of failed banks and PCFs18.

2.1 The Main Players

A diverse range ofbanksprovide wholesale and retail banking services to different marketsegments, namely state-owned, urban and rural joint stock, joint venture, and foreign banks.The four main state-owned commercial banks (SOCBs) dominate the sector. In addition,there are 37 joint stock commercial banks (JSCBs), which account for roughly 15% of

15Inflation rates are for the first six months of 2008.

16 World Bank: East Asia and Pacific Update Testing Times Ahead, April 2008.17 World Bank: Taking Stock, June 2008.18

DIV: Annual Report 2005: Report on 2005 Operations and Business plan for 2006.

2004 2005 2006 2007E 2008 FGDP current billion $ (WDI/CS) 31.17 53.10 61.00 71.2 90.1Real GDP Growth (%) 7.8 8.4 8.2 8.5 7.5Real GDP per capita income (US$) (GSO) $401 $639 $723 $835 1,043

GNI per capital (US$) $ 690Inflation rate, GDP deflator (annual %) 3.4 8.2 7.3 12.63 18.115

FDI net inflow (US$ million) (WDI/CS) 1,298 1,954 2,315 6,550 12,000Current account balance, % of GDP -3.8 -1.5 -0.8 -9.9 -10.3Fiscal deficit, % of GDP 2.8 -0.8 -0.9 -0.7 -0.5ODA, US$ millions (WDI, 2008) 1,681 1,907 1,845 .. ..Average exchange rate $ (ABD 2008) 15,741 15,859 15,994 15,995 ..Data Sources: World Development Indicators, 2008 International Monetary Fund (2007), AsianDevelopment Bank, Key Indicators of Developing Asian and Pacific Countries, 2007, ADB: AsianDevelopment Outlook 2008; GSO: Statistical year Book of Viet Nam 2007; Credit Suisse Research.


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total assets, five joint venture banks (JVBs), and 28 foreign-owned banks with 39branches.19 From 2003 to 2006, the number of banks increased from 69 to 80, but thenumber of joint stock banks has been consolidated from 54 to 37 through mergers andacquisitions.

In the initial stages of Viet Nams economic transition, individuals did not use the bankingsystem to any large extent. In 1993, only 25% came from banks and other formal sources20.Until 2004, Viet Nam had rather shallow financial depth. However, by 2007 that depth hadincreased sharply, with indicators such as the credit/GDP ratio reaching 82.5%, andM2/GDP rising to 112.1% from a base of 23.8% in 199621. Of this, credit to the privatesector increased from 18% in 1992 to 68.6% in March 2007 22.

Reforms are continuing to transform (equitize or privatize) SOCBs to a morecommercially sound footing. These SOCBs have improved operations and havestrengthened their balance sheets over the past five years, but an estimated average rate of8-10% non-performing loans will require significant provisioning as they undergo equitizationover the coming three years. The government has already invested $635 million to

recapitalize the banks and offset losses23

(from 2001-05).

Table 4. Formal Financial Sector Providers in Viet Nam at a Glance

With initial support from CIDA, the network of Peoples Credit Funds (PCFs) wereestablished in 1993 under a Prime-ministerial decision. PCFs are community-basedfinancial cooperatives that are owned, operated, and governed by shareholdingmembers, modeled after the Desjardins (caisses populaires) in Quebec, Canada. PCFsare licensed under the Cooperative Law, regulated by the Law on Credit Institutions,

and supervised by the SBV under the Banking Law on their adherence to set standardsregarding financial management and member capacity. In 2007, SBV granted businesslicenses to 50 new PCFs, and as of December 2007, there were 982 PCFs operating in 56provinces and cities. A central apex institution, the Central Peoples Credit Fund (CCF),was formed in 1995. CCF, which may soon receive a name change to the CooperativeBank, attracts and mobilizes capital from shareholders (the PCFs and the four SOCBs),donors and public deposits, serves commercial and urban customers from its 54branches and supervises/intermediates funds to the local PCFs. Like VBARD and

19 State Bank of Viet Nam: 2004 Annual Report.20

1993 Viet Nam Living Standards Survey (VLSS) quoted in Viet Nam Development Report 2006: Business.21ADBI: Managing Capital Inflows: the Case of Viet Nam, May 2008.

22IMF: Viet Nam Country Report 07/386, Statistical Appendix, December 2007.

23 World Bank: Country program Strategy 2007-2011. Some analysts believe the NPL of the SOCBs is even larger at 15-30%as per Federal Reserve Bank of San Francisco: Asia Focus, February 2008.24

Federal Reserve Bank of San Francisco: Asia Focus, February 2008.

Type of Institution # NamesState-owned Commercial Banks(SOCBs)

4 VietcomBank, VietInBank, BIVD, and the largestbank in Viet Nam: Viet Nam Bank for Agriculture andRural Development (VBARD or AgriBank).

Joint Stock Commercial Banks(JSCBs)

37 Asian Commercial Bank (ACB), Sacombank andTechcombank hold about a third of total JSCBassets24.

Joint Venture Banks (JVBs) 5 VinaSiam, Viet Nam-Laos JV Bank and othersForeign owned Banks 28 Citi, ANZ, HSBC among many othersCooperatives 982 Peoples Credit Funds and their apex the Central Credit

FundPolicy Lending Banks 2 Viet Nam Bank for Social Policy (VBSP) and Viet Nam

Development Bank (VDB)Non-Bank Financial Institutions 55 Viet Nam Postal Savings Company (VPSC), 5 sectoral

financing companies, 12 leasing companies and 37insurance companies.


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VBSP, the CCF is regulated by the Credit Institution Law and is supervised by theSBV25.

Policy lendingis a key feature of Viet Nams financial sector. The Viet Nam Bank for SocialPolicy (VBSP) is mandated to serve the poor and other beneficiaries of government support.The Viet Nam Development Bank (VDB) serves primarily government projects, state-ownedenterprises and, to a small extent (and with the support of international donors), privateSMEs in the infrastructure and export sectors. Both lend on subsidized and non-marketterms. VBSP and VDB are regulated by SBV and other government agencies under theirown specific decrees and are the main vehicles for government transfers.

Non-Bank Financial Institutionsinclude the Viet Nam Postal Savings Company (VPSC), fiveother sectoral financing companies with limited banking licenses, a growing insurancesector, and 12 leasing companies affiliated with SOCBs or foreign banks.

Viet Nam's banking sector is often considered both heavily fragmented and concentrated,and the supply market is indeed crowded and complex. Fragmentation is caused by certain

banks being assigned to specific market segments. VBARD, for example, is assigned to therural and agricultural sector. This has, to a certain extent, restrained risk-sharing within thebanking system and has narrowed the borrowing choices of businesses. Concentration isevident from the fact that the four dominant (and one smaller) State-owned CommercialBanks (SOCBs) account for about 70% of total assets, and 65% of total credit anddeposits. The difficulties of the transition from a state-controlled to an open, market-ledeconomy are still apparent in the institutional structure of the sector, although credit anddeposit services have increased to all-time highs.

The financial depth of the formal financial sector and the existence of policy lenders meanthat there is no clear market delineation between the formal banking sector and themicrofinance market. The constraints related to fragmentation, concentration, the existence

of subsidized policy lenders, and interest rate controls are affecting the entire financialsector.

2.2 Credit Services Figure 5. Recent Credit growth

Overall credit grew by 50.6% from2006 to 2007, well above the 30%target set by the government. Inthat period, 65.3% of all creditextended by the SOCBs and82.5% of credit provided by other

banks were for the private sector

26

.SOCB credit increased by arestrained 25% partly due topreparation for equitization.JSCBs, on the other hand,expanded credit by an astounding95% from 2006 to 2007 in anattempt to gain market shares intheir core market of privatecompanies, households, and individuals. Private sector loans accounted for 77% of the totalJSCB loans outstanding (2007) and were provided as consumer loans (35%) and commercialloans to SMEs. For many of the JSCBs, however, the average loan size per customer

25 World Bank: Taking stock, 2006.26

IMF: Viet Nam Country Report 07/386 Statistical Appendix, December 2007.


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exceeded VND 600 million (2006), indicating that they do not in general serve the lowerincome segment.

While several JSCBs are backed by credible foreign partners, others have much less riskmanagement capabilities, which raises concerns about credit quality especially as manysmaller JSCBs have invested heavily in stocks and real estate. Stock markets lostdramatically in 2007 and the real estate bubble may lead to eventual losses there too. It isestimated that 10% of all bank loans in early 2008 were for real estate, compared to 3% ayear before27.

VBARD is the dominant provider of rural financial services. It does not directly targetthe poor, but serves poorer segments of the population through targeted programscapitalized by donor funds and through framework agreements with MassOrganizations, particularly the Farmers and Womens Unions. SMEs are also animportant market segment for SOCBs and the urban joint-stock banks.

2.3 Savings Services

Formal financial intermediation has increased rapidly in Viet Nam, if not at the frenetic paceof credit. Confidence in the banking system has grown, as evidenced by the growth indeposits from 43% of GDP in 2000 to 82% in 2006.28 Recently, however, this confidencehas been shaken by the near-crash of the stock exchanges and the increase in prices andinflation, and deposits have dipped during the past year (see Figure 9). Interestingly,deposits in gold have increased and banks such as VBARD are accepting increasing golddeposits from customers.

Figure 6. Growth of credit, deposits, and broad money29

Based on a rough estimate, thereare about 25 million active

voluntary savings accountsprovided by formal financialinstitutions (2006), which is morethan the total number ofhouseholds in the country30. Thisrepresents a total of $49.9 billion indeposits (2006). However, most ofthe savings accounts are currentor short-term, and Viet Nam stillneeds to mobilize more domesticlong-term financing to reduce themismatch between deposits andloans in order for banks to provide

longer-term loans as demanded among enterprises and to meet the ambitious growth targetof 40% of GDP (or US$140 billion) from 2006 to 2011 31.

2.4 Other Financial Services

Remittancesform an important part of Viet Nams financial landscape as inflows primarilyfrom overseas Vietnamese and laborers abroad. Private remittances are estimated to reach

27

World Bank: Taking Stock, 2008. See also GS Economic Research Website: Asia Economics Flash, May 2008.28IFC, Financial Sector Diagnostic, 2007.

29Courtesy of World Bank: Taking Stock, June 2008.

30 Viet Nam Development Report 2006: Business. The estimate of savings accounts was compiled by the World Bank based onannual reports from banks and other sources.31

World Bank: Financial Market Infrastructure Development Project Information Document, November 2007.


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over $6 billion in 2007, almost as much as Foreign Direct Investment inflows32. Remittancesare generally channeled through the formal financial system and transfer services areavailable from most regulated financial service providers either directly or through agentarrangements with specialized providers such as Western Union and MoneyGram.

Social insuranceand protection programs have been a focus area for the government overmany years as well, and health insurance as well as pension schemes are available to low-income households. However, overall insurance penetration rate is lower in Viet Nam thanelsewhere in the region with more than 90% of the population not having any formalinsurance policy.33 The private sector insurance industry has only recently begun expanding,and a series of policy and market changes have taken place over the past two yearsfostered by increased competition.

Starting from a very low base, growth rates are impressive. By the end of 2006, there were37 firms of various legal form and scale operating in the regulated life and non-lifeinsurance, reinsurance, and insurance brokerage sectors. Of these, three were fully state-owned (Bao Viet, Bao Minh, and Petro Viet Nam), 16 were joint stock companies, four were

joint ventures and the remaining 14 were fully private

34

.Figure 7. Growth of insurance products

The life insurance marketstarted only in 1996 whenthe state-owned Bao Vietinsurance monopoly wasconverted into the VietNam InsuranceCorporation. Since 1980,Bao Viet has set up anationwide network to

provide servicesthroughout the country.

Bao Viet and Prudentialeach have around 40%market share by lifepremium income (2004),and the top threecompanies (includingManulife) commandaround 90% of the

market today. Combined life insurance products with savings and investmentelements have accounted for a good part of the growth, but with the competitionfrom the banks and stock market heating up in 2007, this alternative to long-termsavings instruments has come under pressure. The non-life insurance market(property and assets, fire and health) grew 25% year-on-year in 2006, totaling salesof $189 million. Viet Nam has 15 domestic companies selling non-life insurance, butBao Viet (32% of total premium sales) and Bao Minh (24%) also dominate the non-life market.

32 World Bank, Taking Stock, June 2008.33 Mark V.T. Saunders and Adrian Liu: Life Insurance 2/2006: Viet Nam: A New Star in the East.34

World Bank: Viet Nam Development Report 2008 Social Protection, June 2008, from where the figure is also taken.


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2.5 Access to Finance by the Bottom of the Pyramid (BOP)

There is consensus that the traditional market for microfinance services in Viet Namconstitutes 24 million poor and low income people, or 5.4 million low-income households(LIHs) at the bottom of the economic pyramid (BOP). Among the poor, and in rural areas,

VBSP, some PCFs and the semi-formal microfinance organizations constitute the mainproviders of credit, complemented to some extent by the directed credit channeled throughVBARD and a vibrant, informal system of credit providers or traders, local shops, moneylenders, and savings- and credit groups, of which many have developed in collaboration withsocio-political Mass Organizations. Even with a relatively aggressive adjustment for doublecounting, it appears that these financial service providers together may provide credit tosome 6.11 million borrowers, exceeding by 12% the total estimated number of LIHs in thecountry35.

One quarter of Kinh and Chinese took loans from formal financial providers in 2006, withVBARD being their primary lender.36 The poorest communities, chiefly ethnic minorities,however, are also reached by credit providers, with one-third of minority households

borrowing from formal sources (see Figure 8). Among the ethnic minorities, 58% of all loansand 70% of all resources borrowed stem from the formal financial sector, VBSP being thedominant source (33% of all credit).

Figure 8. Access to Credit by ethnicity in Viet Nam

Recent indications suggest that VBSP may be evolving into a bank for ethnic minorities.While this may be a short-term solution to access to finance for these communities, thecrowding out of the more commercially oriented VBARD may make it difficult for the poorestto graduate to mainstream finance in the future unless the transformation is accompanied bya long-overdue decision to commercialize VBSP, allowing it to operate as a sustainablebank. Alternatively, the further specialization of VBSP as a lender exclusively catering to the

35 The MIX: How many MFIs and Clients are there in Deutsche Bank Research Current Issues36

World Bank: Viet Nam Development Report 2008 Social protection, June 2008, from where the figure is also taken.


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poorest of the poor in Viet Nam would free up competitive space for more sustainablefinancial service providers in the rest of the traditional microfinance market.

As documented by numerous financial sector reports, most poor and low-incomehouseholds have access to some form of credit, and the formal banking system appears

to reach a substantial number of them. Customers, and especially the poorer amongthem who are eligible for targeted (and subsidized) credit programs, do have a choiceof providers, and this has increased the sensitivity to interest-rates and quality.Unfortunately, most providers are relatively supply-driven and have not markedlyadjusted products and services to changing needs among their clientele. Therefore,customers generally appear to compose a suitable package of financial services forthemselves from multiple sources, and multiple borrowing is widespread and largelyundetected due to a lack of credit reference systems and information sharing amongmicrofinance providers.

For most microfinance clients, therefore, access to any credit is no longer as much ofan issue as is a loan that properly suits their needs. There is an increasingly

sophisticated demand for larger and differently structured loans. Rather than traditionaloutreach to cover a very large unmet demand for financial services, the challenge forsuccessful microfinance in Viet Nam is thus the provision of specialized services topoor entrepreneurs and households in more remote areas, and the identification andretention of relatively poorer clients in more accessible areas in direct competition withsupply-driven and subsidized policy lenders and increasingly commercial banks.

The availability of liquid, small-balance savings products that poor people generally demandis more limited than credit in the policy-driven microfinance market in Viet Nam. Therelatively extensive branch network of VBARD, VPSC via the post offices, VBSP and thegrowing PCF network does in principle ensure access by most BOP households to formalsector savings services in proximity to their residences. However, as assigned banks, bothVBSP and VPSC are required to transfer mobilized voluntary savings to other governmentinvestment vehicles such as VDB, or face deductions in their government funding budgets,and hence their motivation to expand savings services is limited. VBARD, as a morecommercial bank, prefers larger and longer-term deposits, and thus does not offer manysavings products that are suitable for the poor. MFOs remain barred from intermediatingvoluntary savings until Decree 28/165 comes into effect and they become licensed. With thetransformation of the largest MFOs to deposit-mobilizing microfinance institutions underDecree 28/165, the supply of more sophisticated savings services to BOP may increase.

By all accounts, the demand for low-cost insurance services among BOP households is veryhigh and largely unmet; on the demand-side, awareness is low and perceived pricing of

premiums is higher than actual costs. On the supply-side, the potential size and profitabilityof the BOP market segment has only recently been recognized with the larger MFOs leadingthe way toward promising life, credit-life, and health insurance schemes.

Outside the traditional BOP market, demand for financial services is also created by smalland medium enterprises, which play a key role in the economy.37 As of 2006, Viet Nam hadover 2.7 million registered businesses, of which 90% were classified as micro-, small andmedium-sized enterprises (MSMEs).38

37SMEs were officially recognized and authorized by Government Decree 90/2001/ND-CP in November 2001 to include state-

owned, private, and cooperative businesses as well as business households. The decree also established an SMEDepartment under the Ministry of Planning and Investment, and a SME Development Plan for 2006-2010 was been approvedin 2006.38

IFC, Financial Sector Diagnostic, 2007.


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Table 9. Enterprise delineation

Businesses in this sector, the enginefor economic growth in Viet Nam,consistently state that insufficientaccess to finance is the mostimportant obstacle to business growth,and the share of firms that see it as asevere or major constraint to theirdevelopment is significantly higherthan in other Asian countries.39 This

appears to be a contradiction because the Vietnamese financial market has expanded at afrenetic pace over the past years and credit to the private sector reached 82.5% of GDP in2007. The explanation relates to credit allocation: as presented above, very small loans (upto VND 30 million or US$1,875) are quite readily available to farmers and micro-businessesin large part because of government policies. However, slightly larger businesses (especiallyin urban areas, with the notable exception of clients of CEP in Ho Chi Minh City) and

households that need credit but do not qualify as poor, face difficulties accessing credit andother financial services.

Formal credit providers are often reluctant to lend to micro and small enterprises (MSEs), orthey require collateral that these businesses and low-income households are unable toprovide. Heavy reliance on collateral is the flip side of the limited capacity for riskassessment by the dominant formal sector lenders40. Delays in the issuance of land usecertificates (LUCs), which can be used as collateral, have compounded the problem. Theinformal markets (money lenders) that are willing to offer finance to MSEs often lend at ratesthat may jeopardize the borrowers business41.

Figure 10. Increasing Sophistication of the Demand for Financial Services42

39World Bank: Doing Business. Viet Nam Country Profile/Survey, 2005.

40Viet Nam Country Development Report 2006: Business.

41 UNDP: Human Development Report, 2004.42 Mai Lan Le & Nhu An Trang: Entering a New Market: Commercial Banks and Small/Micro Enterprise Lending in Viet Nam,ILO Viet Nam Working Paper Series No. 3, 2003.

Enterprise type # of

employees

Assets/Sales

Micro/individual 0-9 Monthly revenueof VND 6-40

million (USD375-2,500)

Small and Medium-

sized

10-299 Max. VND 10billion ($625,000)

Small/householdenterprise(urban)

IncomeLevel/

EnterpriseSize

Types of financial services

Microenterprise(urban)

Microenterprise(rural), urban/

rural poor)

Povert line

Business loans,payment services,insurance, venturecapital, bankaccounts, loans forpurchase of fixedassets, term &current deposits

Income-generating loans,

emergencycredit, targetedsavings, micro-insurance

Consumptionloans, liquidsavings, houseimprovementloans, assetinsurance


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3. Regulations and Government Initiatives

3.1 Financial Sector Reforms

Since the inception of the Doi Moi (renewal) policy in 1986, the government of Viet Nam has

been committed to financial sector reforms. The former mono-bank system in Viet Namwas delineated into a two-tier banking system in the late 1980s, but SBV is still therepresentative owner of the SOCBs. The Banking Law of 1990 and the new chart ofaccounts of SBV introduced in 1993 set the backdrop for a comprehensive reformprogram which gained momentum in 2000 with strong support from many donors. In2003, the SBV adopted a revised and expanded reform strategy to reflect the GovernmentsSocio-Economic Development Plan (SEDP) 2006-2010 for the entire financial sector. Inaddition, a comprehensive roadmap for banking sector reform was issued in May 200643 andexpanded in 2007 to include development of the securities market.

A key step was to fundamentally re-write the Law on Credit Institutions and the Law on the

SBV, and drafts of these new laws are now expected to be adopted by the NationalAssembly in November 2008, when draft laws on deposit insurance and banking supervisionwill also be presented.

Leading the policy intervention to cool the economy, the Central Bank took dramatic,contractionary measures in early 2008 in order to stop the appreciation of the Dong. Thetrading band for the dollar was widened and later foreign currency purchase was stoppedaltogether, and the frenetic pace of credit was curbed by increases in reserve requirementsand forced placements of government bonds. Managing the strong inflows of foreign capitalwill remain a challenge, but it is hoped that the policy mix, if combined with greaterexchange rate flexibility, can ensure continued growth and take some of the strain off thefinancial sector.

3.1.1 Price Setting

Since 2002,44 financial institutions have been free to negotiate their interest rates with theirclients, but lending rates are still capped at a maximum of 150% of the prime rate publishedby the SBV to guide commercial lenders.

With the overheating in the economy resulting in inflation reaching 25% in May 2008,interest rates were raised sharply by the SBV to slow down credit growth. On May 18 th, theprime interest rate was raised from 8.75% to 12% thus lifting the maximum lending rate to18%. In June 2008, the prime was then raised again to 14% providing a maximum lending

rate of 21% p.a. It remains to be seen if this move will actually cool the frenetic creditmarket, but indications are that all commercial banks have hiked lending rates to themaximum.

The inter-bank lending rate (refinancing rate) has also increased to 18-21% for short-termloans. The decreasing liquidity in the market has caused banks to increase interest ratespaid on deposits as well. SOCB deposit rates are now around 17-17.5% p.a. while someJSBs have increased deposit rates to 19%45.

Semi-formal MFOs, as well as future MFIs regulated under Decree 28/165 (see nextsection) will not be subject to the interest rate regulations.

43 Through Prime Ministerial Decision 112 in May, 200644 Decision 546/2002/QD-NHNN by the Governor SBV on May 30, 200245

Communist Party of Viet Nam Online Newspaper: Lending rate close to 21% per annum, 25 June 2008.


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3.2 Policy, Legal and Regulatory Framework for Microfinance

3.2.1 Microfinance Policy Framework

There is no national microfinance strategy in Viet Nam and the principles of sustainability

underpinning Good Practice microfinance are not widely embraced in the countrys policyframework. However, there are indications that SBV is discussing a new project that willinclude a component to develop a national microfinance strategy in the near future.Nonetheless, microfinance is still widely seen as a social tool to combat poverty, and isdifferent. It is therefore excluded from the normal workings of the financial sector. This socialapproach is reflected in general government policies for poverty reduction, and hasintroduced three particular distortions in the microfinance market:

The slow deregulation of interest rates through the SOCBs (see section 3.1.1) hasimplicitly limited the possibility of MFOs to set cost-covering interest rates.

The continued government funding of the Viet Nam Bank for Social Policy (VBSP),

which is mandated to provide supply-driven policy lending at unsustainably low interestrates, is tax-exempt and guaranteed by the government. The broad but non-market ledoutreach of this institution causes distortions in the entire financial system, andundermines sustainable microfinance. Its basic assumption that the poor are notable to afford market interest rates has been proven consistently wrongeverywhere in the world. Permanent access to sustainable financial services thatare provided reliably has proven to be more important than low interest rates loansprovided by unsustainable institutions. There is no reason why Viet Nam should bedifferent.

To date, the only legal basis on which to operate microfinance in Viet Nam has been apartnership with a socio-political Mass Organization (MO), a local PeoplesCommittee, or a similar entity permitted by special authority to conduct financialservices. MOs, with their broad social agenda, are well placed to facilitate mobilizationof their poorest members, but have no reason to champion a more commerciallyoriented approach to microfinance, given the benefits of project funding, jobs andmember services that microfinance partnerships have provided.

The absence of a coherent policy environment and of a commercially-oriented microfinanceindustry reflects the widespread perception of microfinance as a poverty reductioninstrument. In many respects it also reflects the larger financial sector concerns andchallenges in the transition to a liberalized market economy.

3.2.2 Legal and Regulatory Framework for Microfinance46

Over the past three years, the State Bank of Viet Nam has released two Decrees (Nos. 28and 165) and one circular relating to microfinance. This is viewed by stakeholders as anopportunity for the formalization of the microfinance industry. Table 11 presentsatimeline ofthe release of these decrees and circulars.

Issued in 2005, Decree 28 was initially meant to open a window for the strongest and largestmicrofinance organizations to transform into licensed Microfinance Institutions (MFIs), but itposed significant challenges to many stakeholders. The ownership structure was veryrestrictive and did not allow private-sector ownership. Instead, only mass organizations andlocal NGOs were allowed to own MFIs.

46 Text in this section is borrowed with permission from the author, Steven Pennings (Save the Children/US) from Decree28/165 Workshop: highlights and selected issues, Viet Nam Microfinance Working Group Bulletin, Issue 11, July 2008


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Table 11. Timeline of Decrees 28 and 165

Without clear governance structures, access to commercial sources of funds would havebeen very difficult. Some smaller microfinance programs viewed the minimum legal capitalrequirement as too high and feared being shut down. Since mass organizations weresupporting many of these smaller microfinance programs, their imminent closure created adifficult political dilemma.

In response to the debate in the industry, Decree 165/2007/ND-CP was approved onNovember 15, 2007 as a revision to Decree 28, and a Circular (02/2008/ND-CP) was issuedon April 2, 2008 providing guidance to the implementation of the new Decree. The mainrevisions are summarized in Table 12.

Table 12. Key revisions with Decree 165

The minimum legal capital for all types of MFIs is 5 billion VND (about US$313,000). Theminimum legal capital can be in the form of cash, fixed assets, or equity. For most existingmicrofinance organizations, equity from donations and retained earnings will be the mainsource of contributed capital. The maximum share that can be contributed as fixed assets(such as buildings) is 5% to ensure that MFIs have sufficient liquidity to operate.

Table 13. Legal structure of Institutions licensed under Decree 28/165

Previously (Decree 28) Today (Decree 165 & circulars)

Two levels of legal capital for MFIs:(a) To accept voluntary savings, required legalcapital is 5bn VND ($313,000)

(b) Without accepting voluntary savings, requiredcapital is 500m VND ($31,250)

One level of legal capital:(a) To accept voluntary savings, required legalcapital is 5bn VND ( $313,000)

If an MFO cannot be licensed, it has to shut down If an MFO chooses not to be licensed, it can stilloperate so long as (i) it does not acceptvoluntary savings; and (ii) savings are less than50% of equity

Today (Decree 28/165 and circulars)

One-owner Company Multiple-owner Limited Company

MFIs must bewholly owned by aVietnamese socio-politicalorganization

Between two and five owners (except if authorized by the Governor ofthe SBV)

Eligible owners: (A) socio-political organizations, (B) socialorganizations, (C) charities & Social Funds,47 (D) vocationalorganizations (E) Vietnamese NGOs (Decree 88, 30/7/2003), localindividuals, foreign individuals & organizations

Owners A-E must own at least 25%, and must be the largest owners Foreign owners can have a maximum 50% share

Decree 28/2005/ND-CP

- initial regulations

Decree 165/2007/ND-CP - amend &supplement Decree 28

Circular 02/2008/ND-CP

guide to implementing Decree 28and 165

9 March 2005 15 Nov 2007 2 April 2008 5 May 2008

Circular comes intoeffect

10 Dec 2008

Deadline for submitting license to

State Bank (12 months afterDecree 165 came into effect)


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The decree stipulates that the legal owners of the MFI equity must be the same as theowners/operators of the microfinance organization before licensing. In some cases,International NGOs have handed over the ownership of an existing MFOs capital to a LocalPeoples Committee (LPC), but the local Womens Union runs and owns the MFO. In thesecases (if the Womens Union continues to be the majority owner of the program), the LPCwill have to transfer legal ownership of the capital to the Womens Union. Generallyspeaking, the transfer of this capital before licensing is a matter between the owners anddoes not require State Bank approval.

3.2.3 Licensing Requirements: Operational Issues for MFIs

For an existing microfinance organization to be licensed as an MFI, the requirements of theDecrees and Circular include having professional staff as determined by the SBV, abusiness plan, audited financial statements48, an organizational charter, and havingconsulted the local authorities by the due date of 10 December 2008. Some MFOs haveexpressed difficulties in providing a final charter or presenting fit and proper managementas per the requirements49 within the short time frame. However, no delayswill be granted to

any of the licensing criteria in the decree, even for organizations working in remote areaswhere professional staff are difficult to find. It is possible to revise the charter, name, equityor other items after licensing, but these require explicit approval from the State Bank. Somechanges, such as the opening of new branches, also require the approval of the localPeoples Committee (in addition to having the required amount of capital).

The larger, more mature MFOs such as CEP and TYM, and others, are in the process ofpreparing for transformation. There is a general consensus that about six to 10 MFOs mayhave what it takes to transform within the deadline of the decree. The rest will be able tooperate as non-deposit-taking microfinance institutions if they so chose, or can transform tosocial funds.50

The SBV recognizes that currently many microfinance programs are owned/operated by theWomens Union at the commune, district, or provincial levels. However, for all suchmicrofinance organizations, it is the Central Womens Union that must submit the application(dossier) for licensing, because only the Central Womens Union has legal status.

MFIs regulated under the decrees are not allowed to provide microinsurance themselves,but they are allowed to act as insurance agents for insurance companies (Circular, Article55.4). Some existing MFOs, such as M7 Ninh Phuoc, are pursuing this model. Other MFOswith existing microinsurance products (such as TYM) are spinning off these operations intoseparate institutions.

47Social funds established under Decree 177 and 148 are not counted as Vietnamese NGOs.

48 The Ministry of Finance issues a list of authorized auditors MFOs should choose an auditor from this list. The MFI must

have audited financial statements for the last three financial years before applying for a license.49For example, the CEO must have a university decree and at least 3 years of working experience as a manager in the finance

sector. Board Members must comprise accounting, auditing and financial education at university level, expertise and/orexperience. (Circular , 22.1-2)50 Social Funds are regulated by Decree 177/1999/ND-CP of December 22, 1999 Promulgating the Regulation on Organizationand Operation of the Social Funds and Charity Funds.


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Table 14. Definition of licensed MFIs in Viet Nam

All MFIs regulated by the decrees will have the right to borrow from local banks (e.g.VBARD) in Vietnamese Dong, and must negotiate the terms of the loan with the commercialbank themselves without relying on the State Bank for support or political influence.Licensed MFIs can also borrow from abroad in local and foreign currency like any otherprivate enterprise, but this requires permission from the State Bank. Normally this is notoverly strenuous: the MFI and its foreign partner need to register the loan with the SBV and

have to abide by the decrees related to foreign currency transactions.51

The access toforeign capital is a distinct incentive for licensing, as unregulated MFOs will not be able toborrow from abroad.52

4. Microfinance Sector Development

4.1 History

Microfinance in Viet Nam has its roots in government social protection measures for thepoor. Because the vast majority of the poor population lives in rural areas, microfinancehas traditionally been interpreted as the market for financial services for rural

households. Micro-credit in particular has been interpreted as the provision of subsidizedcredit facilities for the poor, and quantitative coverage targets have been promoted inresponse to a perceived unmet demand for credit among the rural poor. This has resulted insupply-driven efforts, led by the government with the participation of many donors, INGOs,and NGO programs which are manifested by embedded revolving credit funds in otherwisewell-focused community development and social mobilization interventions. Comparativelyless attention has been paid to the quality of the debt finance provided, the sustainability of theinstitutions providing the service, and the repayment capacity of borrowers. Increasingly,however, more market-led arrangements are developing.

The Peoples Credit Funds were established in 1993 to address the huge demand forproductive credit in rural areas created by the agricultural reforms in the early 1990s after

the communist credit cooperatives failed in the late 1980s.

The Hunger Eradication and Poverty Reduction Plan (HEPR) launched by the VietnameseGovernment in 1997 focused on improving poor people's access to financial services,especially in rural regions. HEPR was formally established in 1998 as a nationwideframework for integrating poverty reduction efforts targeted at poor households andpoor communes. Government-owned banks (Viet Nam Bank for Agriculture and RuralDevelopment (VBARD) and Viet Nam Bank for Social Policies, VBSP) became the dominant

51

Decree 134/2005/N-CP dated 1/11/2005 on foreign currency transactions, and Circular 09/2004/TT-NHNN dated21/12/2004.52

In the current environment (pre-Decree 28/165 implementation), there is substantial uncertainty in the sector regarding thelegality of MFOs borrowing from abroad. Currently two MFIs (TYM and Binh Minh/SEDA) borrow from KIVA in USD withinterim verbal approval from the State Bank, but this may be related to the fact that KIVA loans are interest-free.

Microfinance Institution:In order to be licensed as an MFI under Decree 28/165 a microfinance organization must meet several requirements:A. The charter capital must be at least 5bn VND.B. The portfolio of microfinance loans must be at least 65% of the Gross Loan Portfolio, where a microfinance loan is

defined as a loan of less than 30m VND (US$ 1,875) (Circular Chapter IV, Article 53.2)C. The portfolio at risk must be less than 5% of the Gross Loan PortfolioD. Prior to licensing, an MFO must document that it is able to cover its operational costs, (i.e. the operational self-

sufficiency ratio must exceed 100%). This will be a challenge for several existing MFOs in Viet Nam.


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providers of financial services to the low-income population, and used the extensive networkof the political mass organizations to mobilize, appraise, and monitor clients.

Viet Nams Party-led government has enabled the mass organizations to be importantstakeholders in the microfinance sector both at the policy and the operational level. TheseMOs, and the Viet Nam Womens Union in particular, have been successful in attractingproject funding for microfinance, as it has been one of the only legal partners forinternational non-governmental organizations and programs wishing to provide microfinancein the country. Most of the semi-formal microfinance programsestablished since the 1990sare thus legally authorized, owned, or implemented by the VWU at central or local levels.Some social funds operated by mass organizations have specialized in microfinance,including the Tau Yeu May Fund (TYM) established by the VWU in 1992 and the Capital AidFund for Employment of the Poor (CEP), established by the Labor Confederation in Ho ChiMinh City in the same year. Today, some 28 organizations offer microfinance services in 36provinces (57% of total provinces) but they have, with a very few exceptions, been unable toattain significant scale and sustainability.

4.2. The Retail Sector: Financial Service Providers

The Vietnamese microfinance market is characterized by the dominance in scale anddepth by three formal providers, the state-owned VBARD, the policy lender VBSP andthe 984 Peoples Credit Funds. These main providers all pursue the market for small,particularly rural loans and savings accounts, but with very different approaches. TheViet Nam Postal Savings Company, established in 1999 has the potential to become animportant deposit mobilizer in Viet Nam with convenient outreach and competitiveinterest rates.

Viet Nam Bank for Agriculture and Rural Development, VBARD or AgriBank, is thelargest bank in the country and by far the largest provider of the full range of financialservices in rural Viet Nam. The darling of the donor community, VBARD has implemented111 projects at a value of $4 billion, as at end 2007, with large and subsidized credit linesreceived from ADB, the World Bank, and Agence Franais de Developpement inparticular.

VBARD specializes in lending to rural households and SMEs involved in agriculture oroff-farm enterprises, but the bank has recently expanded its urban branch network tocapture the market of urban SMEs. Forty-five percent of total deposits are mobilizedin urban areas while 55% are lent out rurally. Through donor-funded programs andtargeted credit lines, as well as the framework agreements with the massorganizations (in particular the Womens Union and Farmers Union), the bank

purports to reach some 4.7 million poor rural households

53

.

The network ofPeoples Credit Funds (PCFs)has expanded rapidly all over the countryin the past 15 years. PCFs are computerized and are currently introducing an electronicpayment and fund transfer product, as well as remittances, for its members, supported bythe Bill and Melinda Gates Foundation54. The PCF network has long-standing donorsupport from the Canadian and German cooperative movements through DID and theGerman development agency, Gesellschaft fr Technische Zusammenarbeit (GtZ), andsince 2006 has received concessional capital for on-lending also from AECI55.

53VBARD reports a customer base of 10 million farmers of whom 47% are considered poor.

54 Dveloppement International Desjardins: The Bill and Melinda Gates Foundation and DID enter into agreement to developfinancial cooperative interconnectivity in West Africa, Haiti and Viet Nam, January 2008.55

AECI Viet Nam: Specific Agreement between Spanish International Cooperation Agency (AECI) and CCF, July 2005.


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15 founding members are required to set up a PCF. Being generally better off, thefounding members need to provide an initial capital base of at least VND 50 million($3,000) by buying shares amounting to at least VND 3.3 million ($220) each. Onceregistered, the PCF recruits more shareholding members at a price of VND 50,000 ($4)per share, who are then eligible to save and take loans. About 84% of PCFs assets arefunded internally (by savings and capital).

The Viet Nam Bank for Social Policy was reconstituted in 2002 from the Viet NamBank for the Poor, and has a nationwide network, partly subsidized by local PeoplesCommittees. As the key government vehicle to channel subsidized credit for policypurposes, VBSP is fully guaranteed by the government and exempt from taxes, statebudget remittances, and the deposit insurance scheme. VBSP mobilizes anincreasing amount of capital for lending, including deposits from the public, donorfunds (IFAD, OPEC) and a mandatory contribution of 2% of the deposits of theSOCBs. VBSP lends primarily to small businesses in remote areas, and tohouseholds identified as poor by the LPCs, but has recently also been lending toSMEs for job creation.

Since 2006, services extended to ethnic minorities especially in the Central Highlandsincreased in line with the policy agenda, but loans to ethnic minorities still representedonly 2% of loans outstanding in June 200656. VBSP outsources client mobilization andmonitoring to the mass organizations, and hence has a remarkable microfinance marketpenetration of 23.5% (assuming a poor and low-income market of 24 million), earning itthe second-from-the top spot in the MIX Asia 100 ranking in 2006.

The Viet Nam Postal Savings Company (VPSC) was established in 1999 as a unit ofthe Viet Nam Posts and Telecommunications (VNPT) to mobilize idle money from thepublic through the national post office network. It is not allowed to provide credit or openbusiness accounts, but offers transfers and term, current, and collection savings

accounts. The mobilized deposits are transferred to the government for projectinvestments, primarily via the Viet Nam Development Bank, which dampens the incentivefor the VPSC to increase savings mobilization. When VNPT restructured into aneconomic group, the VPSC became a subsidiary. It started its equitization process in2007 and plans to get licensed as a commercial retail bank for the VNPT group.

Semi-formal Microfinance Organizations are intrinsically linked to massorganizations in Viet Nam that legally govern, sponsor, or work in cooperation withInternational Non-Governmental Organizations (INGOs) to implement microfinanceprograms. The Womens Union (VWU), Farmers Union and the Youth Union, with acombined membership of about 20 million, are all managing group loan and savingsschemes, implementing INGO-supported microfinance projects, and linking clients to

VBARD and VBSP through framework agreements57. Mass organizations are involved inproviding loan guarantees, group formation and monitoring, checking clients credithistory, and delinquency management. The VWU has no specialized microfinance units,but has integrated the savings and credit operations with other (primarily social) activities,employing its existing staff and organizational structure. With Decree 165 coming intoeffect, VWU has contracted technical assistance to determine the future of their ACCESSProgram and the broader future role of VWU in microfinance58. As of June 2008, therewere 25 semi-formal microfinance organizations reporting their outreach and financialdata to the Viet Nam Microfinance Working Group (MFWG). In total, these 25 MFOs

56

VBSP: Operation of Viet Nam bank for social policies in contribution to poverty alleviation, November 2006.57Both VBARD and VBSP have signed Framework Agreements with MOs in many areas that has made it easier for many poor

to access the banks. MOs organize their (poorer) members in groups, provide crucial legitimacy in the loan application process,and act as informal guarantors for the clients against a small commission.58 WVU and BTC: Procurement of Feasibility Study for ACCESS revolving Fund and Microfinance activities within the Viet NamWomens Union, Terms of Reference, May, 2008.


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reach 183,586 clients as of December 31, 2007 with a loan portfolio of $16,657,888. Theaverage loan size is $80-90. The largest programs are: the Capital Fund for Employmentof the Poor (CEP), the ACCESS Program (WU), Tao Yeu May Fund (TYM), the CapitalFund for Employment of the Poor in Ba Ria Vung Tau, WU - Ha Tinh, and the sevenmicrofinance programs that form part of the M7 network. Currently, four MFOs report tothe global microfinance database, the MIX Market, as does VBSP.

Table 15. Description of main MFOs

CEP(CapitalFund forEmploymentof the Poor)

CEP is the oldest and largest of the semi-formal MFOs in Viet Nam, establishedin 1991 by the Labor Confederation to create employment and job opportunitiesfor the urban poor in all 24 districts of Ho Chi Minh City. It is currently expandinginto peri-urban areas. CEP is recognized by the government, but remains anNGO. CEP has accessed debt to finance growth and has a debt/equity ratio of 93%(2007), of which 60% is compulsory savings. Most of CEPs debt is unsecured,interest free or concessionary, and each loan is earmarked to a specific project. As ofDecember 2007, CEP had a loan portfolio of $12,995,813 reaching 74,360 clients.The average loan size is $ 175.

Tao Yeu May(TYM) Fund TYM is a Grameen replicator founded in 1992 by the VWU with 26 branches in nineprovinces in northern Viet Nam serving women exclusively. The program has received

significant technical and capital grant assistance from a number of donors, includingCARD, Grameen Trust, CORDAID and the German Savings Banks Foundation, andhas also accessed quasi-commercial debt finance (debt/equity ratio 118% as ofDecember 2007). As a first step towards transformation into a licensed microfinanceprovider, TYM was instituted as a separate legal entity (non-bank financial institution)with a management board in January 2006, and has been recognized by theGovernment. As of June 2008, TYM had a loan portfolio of $6,299,308 reaching30,869 borrowers. The average loan size is $204.

M7 Network M7 is a network of seven microfinance programs started by Action Aid. They includeM7 Mai Son, M7 Uong Bi, M7 Dien Bien Phu town, M7 Dien Bien Phu Province, M7Dong Trieu, M7 Ninh Phuoc, and M7 Can Loc. The network covers 52 communes in

seven districts. Of the 31,492 active members, about 7,289 come from ethnic minoritygroups. Currently, four M7 members are registered as social funds are regulated byDecree 177 and one is registered as an NGO. As of December 2007, the seven M7MFOs have a consolidated loan portfolio of $2,865,862 reaching 31,492 members.Average loan size is $113.

Several informal savings and credit groups complete the crowded but fragmentedmarket for microfinance in Viet Nam. These local, semi-structured and truly privateinformal finance entities exist in almost every hamlet of Viet Nam as a well-integrated partof the communal safety net. They include Rotating Savings and Credit Associations

(ROSCAs), referred to as Ho in the North and Hui in the South. In the ROSCAs,periodic savings contributions from members are pooled and disbursed to onemember at a time on a rotating basis. Interest rates, membership and loan amountsare decided on either jointly, by a bidding process, or by the organizer. Similarsavings and credit groups are also operated among many mass organizationmembers at the local level. As in most other developing countries, traders,shopkeepers and money lendershave been an important source of informal credit inViet Nam. Interestingly, there are reports that money lenders have started to reducetheir lending rates as a consequence of the increasing outreach of formal and semi-formal financial service providers.


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Table 16. Nine Fast Facts about Microfinance in Viet Nam59

Table 17. Key characteristics of the microfinance providers

59 The MFWGs June 2008 Bulletin will provide a benchmarking analysis comparing MFIs in Vietnam to peer group MFIs inAsia and worldwide. This table is based on an upcoming article by Steven Penning, Save the Children/US.

VBARD VBSP VPSC PCFs CEP TYM MFWGother^

Total

Outreach

# of branches 2,096 8,749 8,000 986 24 26 108 19,989# of borrowers 4,900,000 5,648,140 none 1,209,042 68,490 30,869 183,586 16,540,124% women .. 61 .. 38 75 100 95Gross portfolio $ .. 2,166,443,06

6None 732,000,000 12,995,813 6,299,308 16,567,888 10,156,486

,822Avg. loan balance $ 850 383 .. 610 175 204 80

# of savers 5,400,000 Est. 170,000 .. 1,000,000 21,157 29,326 170,000 6,617,924Savings volume $ 8,460,418,864

(55% of tot)51,008,303 2,680,000000 583,000,000 588,284 3,490 30,000

Avg. savingsbalance

1,567 Est. 300 112-557 583 28 5 6.35

Loans per creditofficer ..

2,833.. ..

651 306 173

PaR(30) .. 3.2% .. .. 1.19% 0.07% 0.06%RoA 1.61 -2.66 .. .. 8.16 5.4 4%RoE 69.3 -9.39 .. .. 15.75 11.75 5%OSS .. 72.65 .. .. 156% 160% 157%

Sources: The MIX Market microfinance database (Dec 2007), VBARD Annual Report 2007; Basic Data on MFOs in Viet Nam (Jun2007); World Bank (2006)The Microfinance Landscape in Vietnam Volume 1 ^Data as of the 31/12/2007, Source: VMFWG, data aresums or medians, risk and financial performance data may be unreliable because self report.

Vietnamese MFOs vs. their Global Peers Nine Fast FactsThe typical microfinance organization (MFO) in Viet Nam differs in many ways from those elsewhere in Asia or theworld, as benchmarked by the Microfinance Bulletin. Below are nine of the most salient points that make VietnameseMFOs unique:

1. They are not privately owned. Due to the absence of a legal framework for MFIs and the Viet Nam-specificrole that mass organizations have, all MFOs in Viet Nam are owned by public or semi-public entities, even ifindependent management boards may be in place. Licensing under Decrees 28/165 will legalize privateownership structures, which commercial investors in general prefer.

2. They are small. They have fewer clients and smaller loan portfolios than their international peer MFIs. Theiraverage number of clients is half the global average of MFIs and one-third of the average for Asian MFIs,even at similar age. Their average loan portfolio is one tenth of the international average for MFIs.

3 They have lower (recorded) expenses, both in terms of operational and financing costs, than theirinternational peers. This may be because Vietnamese MFOs receive a number of implicit subsidies from theWomens Union ranging from free rent to heavily-subsidized credit officers salaries.

4. Because the costs are lower, Vietnamese MFOs are better able to cover their (reported) expenses thaninternational MFIs (as measured by OSS).

5. They are morepoverty-focused by having a smaller loan sizes than their international peers (relative to theper-capita income of the country).

6. They lend almost entirely to women unlike many MFIs outside Asia.7. They generally do not borrow, like their foreign counterparts. They are funded almost entirely by donations,

equity, and savings. This reflects the absence of microfinance regulations that permit borrowing and maychange with Decree 28/165 although many Vietnamese MFOs may be too small to attract lenders.

8. They charge lower interest rates, as measured by their portfolio yield (nominal). As a result, they only havearound half to one-third of the revenue/assets of their international peers. This may be because of thecompetition from the subsidized lender VBSP, or because lower (reported) expenses allow MFPs to chargelower interest rates while still covering costs.

9. Credit officers are more productive, with a higher caseload for credit officers. This relates primarily to theprevalence of group lending products among Vietnamese MFOs, but may also be partly explained by therelatively high population density in Viet Nam (particularly in some rural areas) and by the fact that client

monitoring activities are often done by Womens Union staff on behalf of or as seconded staff to the MFO.


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4.2.1 Products and Services

The market for microfinance services in Viet Nam is not very diversified and the majority ofproviders offer similar and standardized credit and savings products. As the largest provider,VBARD also offers the broadest range of products for its customers, and loans with variable

repayment structures for different purposes are available. There is budding interest amongsome JSCBs, such as TechCombank - with support from the International FinanceCorporation (IFC) - to down-scale to the urban micro-market, which is primarily served byPCFs, the VBSP, and some microfinance organizations (MFOs). In the rural areas, VBARD,VBSP, some PCFs, and the MFOs constitute the main providers of micro-credit and savings.

Credit Products60

With a specialized agricultural bank, agricultural loan products are more easily available inViet Nam than in many other countries. VBARD offers investment and working capital loansfor annual and perennial crops (rice and rubber, tea and coffee) totaling some 32% of itsportfolio; as well as loans for fisheries, livestock (40%), handicrafts and trade (10%), andrural infrastructure. Due to both risk adversity and to the restrictions imposed on donor creditlines, VBARD does not in general offer emergency loans or consumption loans to poorhouseholds.

Table 18. Overview of available loan products

SOCBs JSCBs PCFs VBSP MFWGCollateralized loans:Consumption loan range (VND)Interest rate p.a.% collateral

Max 50 mn9.5-13.5%50-100%

1mn 1 bn9 15%70-200%

100,000130mn9.6-17.4%70 100%

- -

Mortgage/housing

Interest rate p.a.% collateral

Max 70%8.512.9%70-100%

5-158bn

(max 85%)11.4-15.6%70-167%

1mn-300 mn

9.6-16.2%

- -

Investment/working cap. (MSMEs)including agriculture (VBARD)Interest rate p.a.% collateral

Max. 85%

8.5-12.9%70-100%

11-158bn(max 85%)10-15.6%70-167%

1mn-180mn

9.6-17.4%

5m-500mn

10.8%

Max 20 mn

12-24%50%

Poor householdsInterest rate p.a.% collateral

- 1mn-50mn11.4-15.6%70-100%

500,000-9mn8.4-16.2%70-100%

- -

Group loansInterest rate p.a.% collateral

- - - - 0.47-20mn10.32-12%50%

Uncollateralized loans: SOCBs JSCBs PCFs VBSP MFWG

Consumption loan range (VND)Interest rate

- - 0.10130mn9.6-17.4%

Max. 10 mn7.8%

0.10-20mn9.6-12.2%

Mortgage/housing - - 1mn-300 mn9.6-16.2%

Max. 200 mn7.8%

Max. 15 mn6-36 months7.8-14.4%

Investment/working cap. (MSMEs) Max. 10 mn9.6-12.9%

- 1mn-180mn9.6-17.4%

Max. 10 mn9.6%

0.28-20mn9.6-24%

Poor households - - 500,000-9mn8.4-16.2%

Max 30 mn7.8%

0.28-20mn11.3-24%

For commercial loans, VBARD and the other conventional banks will require immovablecollateral (land, real estate, LUC) and lend up to a maximum of 85% of the secured valueover the medium term to individuals and SMEs. VBARD offers loans below VND 10 million($625) to poor farmers and rural households, which are formally collateral-free, but inpractice borrowers must often leave their land use certificate with the bank until the loan

60 The sections on product range are updated from DFC/World Bank: Viet Nam: A Comprehensive Strategy to Expand theAccess [for the poor] to Microfinance Services, Vol. I: The Microfinance Landscape in Viet Nam, February 2007.


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is repaid, or be sponsored (guaranteed) by a mass organization. Such small loans areshort-term, typically six to 12 months, and interest rates have ranged from 9.6 to 12% p.a.per month until the recent interest hike in May 2008. The loan repayment structure variesfrom balloon lump sums (which would suit seasonal crop producers) to monthlyrepayments, which would normally be preferred by the typical petty trade enterprises ofmany microfinance clients. Debt rescheduling is not uncommon and frozen accounts arenot included in arrears reported61.

VBSP lends to households identified as poor by the LPC certificate and to small andmedium-sized businesses in remote areas (for employment creation under thegovernments Program 120). For poor households, the maximum loan amount withoutcollateral is VND 10 million ($625), while collateralized investment loans of up to VND 500million ($31,215) are also provided. The loan terms do not normally exceed three years andrepayments of principal are quarterly (for small loans) or at the end of the term, whileinterest repayments are monthly. VBSP also provides credit to poor students, poorworkers seeking employment or returning from overseas, and for specific purposes,including water and sanitation, non-timber forest product development, and construction

of housing (either to buy/build a house with installment repayment or to companies tobuild housing). In all products, ethnic minorities are given priority. Loans are generallywithout physical collateral but VBSP enters into framework agreements with massorganizations and pays a very small, performance-based remuneration to the MOs(0.06% per month of outstanding balance collected on time) for their identification,selection, grouping and monitoring (debt collection) of poor borrowers. As such,borrowers are normally required by the MOs to form guarantee groups and to depositcompulsory savings with VBSP at an interest rate of 2.4% p.a.

Due to their small size, private (member) ownership, and closeness to borrowers, PCFs canusually provide more varied loan products, albeit at higher interest rates than VBARD. Theinterest rates on loans vary from 13.2 to 17.4% p.a., but loans to poorer members cost an

average of 9% p.a. Some PCFs provide lending for education (short-term) and emergencypurposes; such services effectively reduce members reliance on moneylenders62.

Most INGO-supported programs use a solidarity-group methodology, either of thevillage bank or Grameen type, while a few also provide individual loans and housingloans. Interest rates range between 0.8 and 2% per month, calculated on a flat ordeclining balance. Many of the schemes offer financial services as part of an integratedpackage of other activities63. CEP in Ho Chi Minh City provides individual loans with aflexible daily, weekly, and monthly repayment schedule catering to the urban traders inits portfolio. In collaboration with Habitat for Humanity, a housing improvement loanproduct was recently introduced by the Womens Union of Kien Giang Province (WUKG)which also participates in ACCESS, TYM, and CEP64. CEP also offers loans for sanitation.

In addition to the standard Grameen-type group guaranteed loan, TYM offers a multi-purpose (emergency/consumption) loan with lower amounts and short tenor.

Some agricultural production cooperatives have started savings and credit operationsfor their members in recent years, and are reported to have around 15,000 members.The cooperatives provide individual loans to members as well as loans in-kind (rice).

61 World Bank (2003), Viet Nam Development Report 2004, Report No. 27130-VN quoted in ILO Working Paper Series no. 5:

Towards a Viable Microfinance Sector in Viet Nam, Issues and Challenges, ILO, 2005.62ADB: Rural Credit Project Performance Evaluation Report, November 2005.

63Viet Nam Microfinance Bulletin March 2006 and Draft Final Report: Preparing the Framework for Microfinance

Development, ADB and SBV, Sept. 2004.64 For lessons learned from this pilot project, see MicroNote 35: Habitat for Humanity Viet Nam Partnering with MFIs to improvehousing for the Poor. Http://www.microlinks.org


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Savings Products

The supply of savings products in Viet Nam is equally standardized but relatively widelyavailable. The SOCBs offer a surprisingly limited range of savings products with an absoluteminimum balance of VND 50,000 ($3), but often VND 100,000 is required. A savings book is

issued for each account opened, which can be used as (partial) collateral against a loan,such as at VBARD. Campaigns and drives to open savings accounts for children have beenquite successful but the big market players have yet to offer the very short-term (liquid) andlow-threshold savings accounts popular globally among poor households.

The interest earned on liquid deposits is generally low, and negative in real terms, if inflation istaken into account. But the JSCBs are evidently happier to compete with the SOCBs ondeposit than on lending rates. In general, however, SOCB savings accounts carry no or fewertransaction fees. The VPSC has recently (June 2008) raised its interest on term deposits to16.2% p.a. to attract deposits in preparation for privatization.

About a third of the INGO-programs offer savings services at interests ranging from 2.4 to 6%

p.a. Most MFOs and MOs, as agents for VBSP and VBARD, require compulsory savings asa partial guarantee for the otherwise uncollateralized loans and about one-third of MFOsintermediate these savings in the form of loans. As loans outstanding normally exceed thecompulsory deposits kept, however, the risk associated with this practice is low. Mostprograms implemented with the VWU require borrowers to deposit into a compulsory mutualassistance fund from which funds can be accessed as emergency loans in

Documents

BWTP Vietnam Industry Assessment August 2008